In the last year, or the year before? Do you mean private banks? Sources? The less than 15 billion figure for private banks is in line with figures in the source discussed here, and I found higher figures for individual banks from 2009 and early 2010, but I wonder what figures are the source of your comparison.

According to Financial Times Deutschland German banks have reduced their exposure in Greece significantly in recent months. Citing Bundesbank statistics the paper claims German financial institutions held 10 bn at the beginning of this year down from  16 bn in April 2010. German banks reduced their exposure by 4bn, 2bn of Hypo Real Estate are no longer accounted for in these statistics because they are now in a specifically designated bad bank. The paper points out that the banks reduced their exposure despite an informal standstill agreement in which they pledged to keep their exposure constant. According to those statistics the French banks are still the most exposed on Greece with government bonds worth 11.2 bn.

The current debate is about changing already established relationships between debtors and creditors. Regarding this, we have nothing against voluntary duration extensions. However, the actual level of willingness of private investors to do this is an open question. In contrast, with a duration extension forced on the creditors, risks are significvantly greater than the chances. That way, a credit event would be induced, which would be connected to major risks for the financial market stability. The sovereign bonds turned ailing would no more fulfil the safety requirements of the reserve bank. In addition, it would have to be feared that investors would judge the risks of bonds of other countries to be higher, too - which culd again trigger financing difficulties for these countries and in consequence major turbulences. These risks, which would be unavoidable would Greece decide on its own to not follow up on its duties, are matched only by limited positive effects. Because, given that extensive state bailouts have already been given, the inventory of Greek sovereign bonds in private ownership - with the exception of Greek banks - is long since not as high as often assumed. For that reason, the factual cost participation of the private sector would likely be limited. In addition, the solvency of Greece, the focal point of the success of the rescue measures, would barely be improved by a forced duration extension.

German insurers halved their exposure to the sovereign debt of Greece in the year to March and slashed holdings in Irish, Portuguese, Spanish and Italian debt, according to a report for Germany's parliament.

Their exposure to Greek debt fell to 2.79 billion euros in March 2011 from 5.83 billion a year earlier; Irish debt holdings fell to 3.89 billion from 7.13 billion; Italian debt to 20.04 billion from 27.79 billion; Portuguese debt to 2.79 billion from 4.50 billion and Spanish to 9.06 billion from 20.93 billion.

The data came from a report on German insurers' exposure to sovereign debt prepared for the finance committee of the lower house or Bundestag, which was obtained by Reuters on Thursday.

What sort of discounts are those bonds trading at? That's billions of debit on their balance sheets, surely?

So, they have cut their own hair... sadly, this is of no benefit to the debtor nations.

It follows that the ECB is now stoutly defending the speculators who buy the bonds at steep discount, gambling that they will be repaid in full (or with a modest haircut, at worst).

So, the original lenders (the bond purchasers) have, to a great extent, been punished for their profligate lending. The citizens of the debtor nations are being punished for their profligate borrowing. The reason this is all so painful is that there is a moral imperative to pay in full the only good guys in the affair : the bond speculators.

Have I got that right?

It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II

If they held the bonds in a trading book which was marked to market the losses had been incurred already as the secondary market price of the bonds dropped. So, reducing the exposure by selling the bonds for cash does not incur an immediate loss and improves liquidity while giving up the possibility of recouping if the value of the bonds rises again.

If they held the bonds in an investment book on hold-to-maturity-accounting, they did indeed realise losses.

The "exposures" look like "total principal value". While the market value of some greek bonds has indeed collapesed by 1/2, that's not the case for other countries. So, while you could have "halved your exposure" to Greece by changing the accounting convention from investment to trading, you can't have reduced your Spanish exposure by 1/2 other than by selling (or failing to roll over maturing) bonds.

Just because you have a CDS swap supposedly covering your investment doesn't mean that your counter-party will be able to pay if it is triggered. After all, the whole point of CDS swaps was to enable you to treat risky junk as though they were AAA investments and relieve you of the obnoxious reserve requirements. No one ever thought they would have to pay up and many probably won't. So everyone is afraid to find out.

The example I had in mind was Goldman and AIG. AIG had lost effective internal controls when the former CEO departed and insured below reasonable cost. I do not know if buying a CDO makes sense to free up capital if the CDO is properly priced. I will bet that lots of CDO issuers on Greek debt would be happy to give back premium they have received and then some to be off the hook on those CDOs. And even good rocket scientists make rockets that explode.

I linked the following FT blog by Emma Saunders, from 11 March. I picked up the covered bond purchase number (4.8 billion) instead of the securities markets programme number (13.1 billion), being the holdings of the ECB at end of 2010.

To set the record straight, ECB national accounts show that the central bank held more like 18 per cent than 8 per cent of bonds bought to aid sovereigns in distress.
17.8 per cent of them as at end 2010, to be precise. At the end of December, the total stock of bonds purchased was 73.5bn, and 13.1/73.5 is 17.8 per cent.

(Sorry for the 10 billion euro difference.)

The takeaway point is that, in the 5-and-a-bit months to June 11, the ECB has increased its holdings in the securities markets programme phenomenally :

13 to 75 billion on the SMP (62 billion net purchases)

I've no idea what proportion of the stock of distressed sovereign bonds that represents... any ballpark numbers around?

So :

the ECB claims to be buying up these junk bonds because the market is dysfunctional, i.e. is improperly pricing in the risk of defaults which ALL serious people know to be impossible (which is why they are booked without impairment, as "hold to maturity" zero-risk securities!)

therefore the price of these bonds would be MUCH lower, and the yields higher, if the ECB did not intervene,

I want to understand whether the ECB is buying these bonds directly from the banks, or whether speculators bought the bonds from the banks, then took fright and sold on to the ECB (in the aggregate) : i.e. are the speculators getting a haircut too?

How does default insurance correlate to bond ownership? Is it necessary to own bonds in order to purchase insurance? Are the speculators buying insurance when they buy bonds?

If the bulk of Greek debt is now no longer held by banks, but by speculators who hold insurance, then when the price drops, their interest is best served by default, right? Or by full payment at term without rollover, but unserious people like these speculators know that this is impossible.

I've probably got hold of the wrong end of a stick that may not even exist; but I'm trying to follow the money here. And you people are writing my book for me.

It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II

The European Central Bank failed to fully neutralize the extra liquidity created by its bond purchases for a second time since the program began in May.

The Frankfurt-based ECB said today it drained 60.78 billion euros ($80.66 billion) from money markets via seven-day term deposits, almost 13 billion euros less than the 73.5 billion euros it intended to absorb.

...

The central bank started buying government bonds on May 10 in an effort to restore confidence in markets rattled by the sovereign debt crisis. To ensure the purchases don't swell the money supply and create inflation risks, the ECB each week drains the amount of extra liquidity it has created by offering banks seven-day term deposits.

The ECB failed to auction the 55bn in fixed term deposits it had planned to, and what it did auction (31.86bn) was at a much-higher rate (0.54 per cent) than what it offered at the start of its Securities Markets Programme (SMP). The market seems to be holding tight to liquidity.

which is probably an apples-to-oranges comparison (holdings/outstanding amount?)

So I got the wrong end of the stick, there has not been a massive buy-up of bonds by the ECB in 2011. They have either decided that the markets are correctly pricing the bonds (in contradiction with their "mark-to-book" policy), or have renounced market intervention (recognition that they are powerless?)

In any case, if the ECB holds 50B of Greek bonds, they were mostly bought in 2010, and that comes out to more than a third of the total of SMP holdings (75B) and CBP (60B), no?

It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II

I've no idea what proportion of the stock of distressed sovereign bonds that represents... any ballpark numbers around?

So :
the ECB claims to be buying up these junk bonds because the market is dysfunctional, i.e. is improperly pricing in the risk of defaults which ALL serious people know to be impossible (which is why they are booked without impairment, as "hold to maturity" zero-risk securities!)

If only. The ECB has given no sign that it believes in market failure, and it has not engaged in market-making of last resort. On why people book bonds without impairment, I can only say accounting conventions are bunk and one of the sources of the current crisis.

therefore the price of these bonds would be MUCH lower, and the yields higher, if the ECB did not intervene,

No, the ECB has made no effort to support prices.

I want to understand whether the ECB is buying these bonds directly from the banks, or whether speculators bought the bonds from the banks, then took fright and sold on to the ECB (in the aggregate) : i.e. are the speculators getting a haircut too?

These are open market operations. They buy them from anyone willing to sell to them. I suspect only banks holding the bonds in their marked-to-market "trading book" would have sold. But the "trading book" puts them in the "speculator" category.

How does default insurance correlate to bond ownership? Is it necessary to own bonds in order to purchase insurance? Are the speculators buying insurance when they buy bonds?

CDS is explained to the public as insurance but it isn't. In the US, famously, it was not regulated as insurance (which would have required people to own the bond in order to buy it - or at least it would have made payout of the CDS conditional on presenting the defaulted bond) in order to allow the market to be more liquid and the CDS volume to be unconstrained. Some people speculate purely on CDS (basically, on the CDS spread noise) without touching the bonds at all.

If the bulk of Greek debt is now no longer held by banks, but by speculators who hold insurance, then when the price drops, their interest is best served by default, right? Or by full payment at term without rollover, but unserious people like these speculators know that this is impossible.

The bulk of Greek debt is, as ever, held by Greek banks for their position-making. Basically, banks can pad their balance sheets with government bonds in the absence of other assets. It is in this sense that JakeS says that sovereign bonds are not debt instruments but monetary policy instruments

I've probably got hold of the wrong end of a stick that may not even exist; but I'm trying to follow the money here. And you people are writing my book for me.

I'm still looking for a tangible villain. Given the mechanical inevitability of default for Greece (barring a deus-ex-machina from the ECB, which I think we can agree is not on the cards), the smart money is presumably gaming the ECB's stupidity for all it's worth.

The most obvious way of doing this is by buying CDS.

Therefore, anyone taking a major bet on Greek default, through a CDS position, may wish to influence outcomes by blocking off all alternatives to full payment (impossible) or default (jackpot).

Ratings agencies which declare "anything which is different from full payment (e.g. voluntary rollover) is equivalent to default" would seem to fit with such a strategy.

The head of a ratings agency who secretly held a massive CDS position might make a satisfying villain.

Just thinking out loud here.

It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II

in a default scenario. If I have understood correctly, they are US banks, who must somehow trust implicitly that the ECB will not allow default. Or that the US government or Fed will not allow the ECB to allow default?

My head hurts.

It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II

They are not the suckers. They are collecting CDS premia (16% annual rate on Greek CDS right now) without being capitalised for paying out and everyone is doing their best that there isn't a default so they don't have to pay.

If you sell insurance with no intention of paying out, is that not fraudulent?

so if they have any overt or covert influence to exercise over events in my ficticious world, it will be working against the interests of my hypothetical speculator/credit rater. They would NOT want "voluntary" bond rollover to trigger a credit event.

This is all a matter of parasitical side-bets on the main events of Euro liquidity/solvency matters, but the stakes are high.

It could all get quite violent.

It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II

Writing a crime novel is easy, comparatively speaking. But I would prefer that it were plausible and didactic in nature.

It's a variation on the old "insure and burn" scam. No, it's actually more like match-fixing : placing bets on outcomes, and reducing the uncertainties.

I would prefer if I could identify actors who stand to gain from the Euro crisis itself, rather than CDS side-bets, and who might therefore wish to influence outcomes. But I haven't identified anyone yet : it looks like a lose-lose-lose situation, a seriously negative-sum game.

It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II

I would prefer if I could identify actors who stand to gain from the Euro crisis itself, rather than CDS side-bets, and who might therefore wish to influence outcomes. But I haven't identified anyone yet : it looks like a lose-lose-lose situation, a seriously negative-sum game.

In terms of money? Certainly.

In terms of goods and resources? Absolutely.

In terms of power? No. Power over others is a zero-sum game.

But of course this is a case where reality is unrealistic. It is hard to make a character in a book motivated by power over other people without having him become a caricature sociopath.

Greece's total debt is 340 billion euros, according to data compiled by Bloomberg. The 7.4 billion euros in Greek government bonds held by FMS Wertmanagement, which is winding down assets of Germany's Hypo Real Estate Holdings, weren't included in the BIS figures because FMS isn't a bank. Neither were the holdings of the European Central Bank, or ECB, estimated at 50 billion euros by Citigroup. Greek banks own about 60 billion euros of the country's debt, according to Goldman Sachs.